Goodwill valuations certified by independent experts: Bigger and cleaner impairments?

Abstract

If firms disclose the use of independent valuation experts to assess the magnitude of goodwill impairments, should investors rationally condition their values on that disclosure? This research shows that firms that disclose the use of an independent valuation expert are more likely to report a higher impairment charge in an impairment year but, critically, after controlling for other determinants, the disclosing firms are less likely to have impairments in following years. Thus, when the use of an independent expert is disclosed, while it is rational for investors to downgrade firm value on the basis of the disclosed (higher) impairment charge in that year, there is simultaneously a reduced need to add an additional discount to anticipate further (strategically) delayed impairment charges. The investors need to consider the likely multi‐period time series properties of impairments, and firms may benefit from using an expert if in anticipation of future related impairments, investors significantly reduce the discount applied.

Managerial discretion to delay the recognition of goodwill impairment: The role of enforcement

“…Goodwill is a material asset for listed firms and goodwill impairment has a significant impact on earnings. Concerns about the reliability and the costs of the mark‐to‐model fair value estimates for goodwill (Gietzmann & Wang, 2020; Shalev et al., 2013), currently required under US GAAP and IFRS, have led to discussions in some countries about a return to amortization of goodwill. Using data for firms in 36 countries, our study is the first to focus on the association between enforcement and the use of optimistic valuation assumptions, and on a substitution effect between the use of cash flow management and optimistic valuation assumptions to delay goodwill impairment.…”

Tax rule changes and the timing of asset write‐offs in loss firms

“…Furthermore, we contribute to the financial reporting literature that investigates firms' write-off and impairment behavior. While prior literature is concerned with firm characteristics that influence write-offs and impairments (e.g., DeAngelo et al, 1994;Francis et al, 1996;Gietzmann & Wang 2019;Hazarika et al, 2012;Moore, 1973;Pourciau, 1993), we provide evidence that the institutional environment is an important determinant of firms' write-off behavior.…”

Goodwill Impairment and Market Reaction -Empirical Evidence from Chinese Listed Companies

“…The behavior of companies in the stock market can be worse as goodwill impairment increases (Xu et al, 2011). The information of goodwill impairment has negative impacts on investors and the capital market as a whole (Gietzmann, 2019).…”

“…The advantages enjoyed by state-owned companies will decline if the proportion of state-owned equity declines, at the same time the constraints faced by state-owned companies will increase. There are various differences of Goodwill impairment between private and state-owned companies due to the nature of their ownership [5][6][7][8][9][10][11][12].…”